New, Revolutionary Way To Measure The Economy Is Coming -- Believe Me, This Is A Big Deal

This month a new way to measure the economy will be released, which, as time passes, will have a profound and manifestly positive impact on economic policy and politics.

The statistic is called Gross Output and will be issued by the Bureau of Economic Analysis (housed within the Commerce Department), which also issues GDP numbers. Both will be released on a quarterly basis.

Why is GO such a big deal? Because it measures the economy in a far more comprehensive and accurate manner. GDP represents the value of all final products and services. It ignores all the steps that go into the making of these things. It's sort of like looking at a carton of milk and paying no heed to everything that goes into creating that milk and getting the carton onto the store shelf.

GDP thus gives a distorted picture of the economy. How many times do we read that consumption represents 70% of the economy and therefore it's important to "stimulate demand" by increasing government spending?

In figuring GDP, government spending is said to represent 20% of the economy, investment a measly 13%. (Incredibly, imports are counted as a negative for the economy and subtract 3% from GDP. Protectionists love this absurdity.)

GO counts all the intermediate steps in the making of products and services. The results are stunning: Consumption is 40% of the economy, not 70%; government outlays are down to 9%; and business spending soars to 50%.

This new statistic will also better reflect the volatility in the ups and downs of economic activity. The 2007–09 recession was deeper than GDP figures reflected, the recovery somewhat better.

Noted economist Mark Skousen has long been pushing for a more accurate way to measure the economy and thus deserves a Nobel for his work on this (and won't get it, given the politics of the economics profession these days). Skousen is well aware of what GO means. As he wrote on Forbes.com, "Consumer spending is largely the effect, not the cause, of prosperity."

GO rightly puts investment and business in their rightfully large places.

GO has flaws. It leaves out some sales at the wholesale and retail levels--for reasons that only theologians immersed in how-many-angels-can-dance-on-the-head-of-a-pin kinds of discussions could love. It still counts government spending as a plus instead of a negative. Nevertheless, GO is a huge step forward for the world.

Economic debate will now have a better focus. Keynesians will be squirming and screaming, as their demand focus will look ridiculous and wrong. Ultimately, more sensible tax policies will result.

Steve Forbes is Chairman and Editor-in-Chief of Forbes Media.
Steve’s new book: Reviving America: How Repealing Obamacare, Replacing the Tax Code and Reforming The Fed will Restore Hope and Prosperity co-authored by Elizabeth Ames (McGraw-Hill Professional) came out in De...